U.S. Bank’s big deal will test D.C.'s tolerance for large mergers

The Biden administration now has a test case for its promise to subject bank mergers to greater scrutiny.

After U.S. Bancorp unveiled its blockbuster deal for MUFG Union Bank on Tuesday, the question circulating among analysts and industry watchers was how much resistance the purchase will encounter in Washington, D.C.

The $8 billion merger is the latest in a wave of acquisitions by super-regional banks. It would push U.S. Bank to $664 billion in assets, putting the deal in the crosshairs of critics who have pressured regulators not to rubber-stamp large acquisitions.

In July, when President Biden issued an executive order to the Justice Department and federal regulators “to provide more robust scrutiny” of bank consolidation, the White House noted that it has been 15 years since a bank merger was last denied.

“This deal will test regulators' appetite for mergers that could increase risks to the stability of the U.S. financial system,” said Jeremy Kress, assistant professor of business law at the University of Michigan.

U.S. Bank executives have been in touch with regulators about the deal, as is customary while details are being worked out, company executives said on a call with investors Tuesday. They expressed confidence that the combination will be finalized in the first half of next year.

But complicating the approval process is uncertainty about the future composition of the Federal Reserve Board of Governors, as well a consent order between Union Bank and the Office of the Comptroller of the Currency that was revealed just a day before the deal was announced.

In the consent order, the Japanese-owned bank was found to be out of compliance with information technology security guidelines from federal regulators. U.S. Bank executives said Tuesday that when they were made aware of the pending consent order, they went back to review the deal and its price.

The Minneapolis company expects that those issues will be resolved once Union Bank’s systems are integrated with its own.

More broadly, Andy Cecere, U.S. Bank’s chairman, president and chief executive officer, argued that the deal will create a “pro-competitive environment” in California, where U.S. Bank is expected to jump from 10th to 5th in deposit share.

There exists “significant overlap” in the two companies’ branch network, and there is opportunity to find some cost savings by consolidating some of those locations, Chief Financial Officer Terry Dolan said. But U.S. Bank executives stressed that they plan to keep the front-line workers and will not leave any low- and moderate-income markets.

“We are going to be very thoughtful there,” Dolan said on the call.

Still, community groups are mobilizing to ensure that regulators take a hard look.

Paulina Gonzalez-Brito, executive director of the California Reinvestment Coalition, said in an email that Black, Indigenous and people of color will be “paying close attention” to a deal that will have a “huge impact” in California.

“This acquisition presents an opportunity for the bank and banking regulators to ensure that before any approvals are given, that there is a public benefit rather than public harm that results,” she said in an email.

Wall Street seems optimistic about the deal. U.S. Bancorp’s stock was trading up more than 3% by Tuesday afternoon.

U.S. Bank executives got to know Union Bank’s leaders last year, when they reached a deal to buy the company’s debt servicing and securities custody portfolio, according to Cecere. When Union Bank went up for sale, U.S. Bank got back in touch and “took a deeper look” at the company, he said.

U.S. Bank aims to apply what analysts believe is a superior technology foundation and a broader set of products to large West Coast markets — Union Bank has 280 branches in California, 14 in Washington state and two in Oregon — where it’s set to establish a stronger foothold.

The goal is to gather enough scale to be a capable regional alternative to JPMorgan Chase, Bank of America and Wells Fargo. Analysts said the move was a long time coming.

“I feel like we've all kind of waited for about a decade for it, so it's nice to see you guys pull the trigger,” Piper Sandler analyst Scott Siefers told U.S. Bank executives on the call Tuesday.

U.S. Bank, which is ranked 9th in deposit share in the sprawling Los Angeles market, would move to 4th if the deal goes through. The company estimates a roughly 20% internal rate of return when the merger is complete and the operations are sewn together.

“Union Bank is the right deal at the right time for the right price,” Cecere said.

There are still questions about how much of Union Bank’s current operations will continue under U.S. Bank’s ownership.

In 2017, Union Bank launched an experiment known as PurePoint Financial that gathered deposits both in person and online. Last year, the bank decided to close PurePoint’s 22 paperless branches and to maintain the brand as digital-only, saying that the move would save money and that PurePoint had gathered the targeted level of deposits.

Asked about PurePoint during the call Tuesday, Dolan said U.S. Bank has not decided whether to keep the unit and its technology platforms going.

"By and large, we think that everything is going to transition to our systems, our platform, our digital capabilities," Dolan said. "So at this particular point in time, that's kind of our game plan."

While MUFG told U.S. Bank in the early stages of talks that it wanted to retain its U.S. corporate and investment bank operations, the sale still represents a substantial retreat from the U.S. market by Tokyo-based Mitsubishi UFJ Financial Group.

The merger would also increase U.S. Bank’s current loans and deposits by about 20%. The decision about whether the bank can successfully handle such a growth spurt will likely rest with a newly remade Federal Reserve Board.

In Washington, Democrats have been debating the potential renomination of Fed Chair Jerome Powell and contemplating the possibility of a more outsized role on regulation for Fed Gov. Lael Brainard. Brainerd has questioned the central bank’s decision to approve PNC Financial Services Group’s recent acquisition of BBVA’s U.S. banking unit.

Brainard, who abstained from the vote on the PNC-BBVA deal, said in a statement at the time that “the increases in banking concentration in the $250 to $700 billion asset size category, where common-sense safeguards have been weakened, raise some concerns.” Brainard, the lone Obama-appointed Fed governor, also suggested in her statement that the central bank should conduct a “broader review of our framework, since we know from experience even noncomplex banks in this size range can pose risk to the financial system when they encounter financial distress.”

PNC CEO Bill Demchak commented in July on Biden-era changes in the regulatory environment, saying: “It is safe to say that a larger deal in today’s environment would get much more political scrutiny and noise than we did with the BBVA deal.”

In Washington, some key outstanding variables could affect the timeline for approving the U.S. Bank deal. Over the summer, when the Biden White House encouraged tighter scrutiny of bank mergers, it argued that excessive consolidation raises costs for consumers, restricts credit for small business and hurts low-income communities.

The administration’s executive order is expected to impact an ongoing Department of Justice review of bank merger guidelines, but it remains to be seen how independent regulators at the Fed may adjust their analysis in the coming months and years. The DOJ’s antitrust division has said that it “has and will continue to consult with the Federal Reserve and other banking agencies” on the update.

There is also significant uncertainty about whether Powell will be reappointed and who will succeed Randal Quarles when his term as vice chair of supervision ends in October.

“Even if U.S. Bank received an implicit or explicit assurance that the deal would be approved, that assurance might not mean much depending on how the leadership of the Federal Reserve changes over the next few months,” Kress said.

Penny Crosman contributed to this story.